Fixing Bitcoin Part II: Pricing with Bitcoin Units

will-work-for-bitcoin-560x325If I had to sum up Bitcoin, I’d have to say that it is a remarkably great thing tied inextricably to a remarkably bad thing. My criticisms of Bitcoin as a currency are pretty extensive at this point, so I won’t rehash them.

However, I personally think the blockchain could be completely game changing, which is why I attempted to “fix” the Bitcoin currency problem.

I wasn’t sure that what I proposed would work so I decided to see if it was possible to create a method for pricing based on my concept. Using the variables I created, it is indeed not only possible but easy to use Bitcoin strictly as mostly whole units. Indeed, what I’m about to show is that it is pretty simple to make Bitcoin just as easy to use as fiat money.

What I’m proposing allows Bitcoin to be used mostly in whole units irrespective of what it is trading for. This system easily moves from Bitcoin to fiat currency and vice versa. Let’s start with the variables:

  1. Price of item in fiat currency;
  2. Maximum Exchange Rate (= 10 units of correlated fiat currency);
  3. # of expansions of the Fractional Rate. This correlates to demand and is equal to the number of times Bitcoin exceeds the Maximum Exchange Rate. For instance, a Fractional Rate of .000000000000001 means that demand for Bitcoin has caused its exchange rate to “turn over” 15 times. This number is easily determined simply by counting the number of places to the right of the decimal point. In the above example, the # of expansions of the Fractional Rate would be 15.
  4. Price of item in bitcoin units.

The formula for converting fiat pricing to Bitcoin pricing would be as follows:

((price in fiat currency) / (maximum exchange rate = 10)) * (# of unit expansions) = (price in bitcoin units)

Let’s say you want to sell an $899 PC in Bitcoin units. Using today’s current Bitcoin exchange rate in $USD, here’s how it would look:

($899 / 10) * ($221.20/10 = 22) = 1977.80 BTC units

Note: “221.20” is Bitcoin’s exchange rate in $USD as of this very instant; to approximate the Fractional Rate, this number is simply divided by my proposed Maximum Exchange Rate of 10 units of a correlated fiat currency. In this example, this would be equivalent to $10USD.

Conversely, the formula for converting Bitcoin pricing to fiat pricing would be as follows::

((price in bitcoin units) / (# of unit expansions)) * (maximum exchange rate = 10) = (price of in fiat currency)

Using the previous dollar figure of $899, let’s convert Bitcoin units into fiat currency:

(1977.80 / ($221.20/10 = 22)) * 10 = $899

Lets say the fractional rate is 71 instead of 22. Using the same $899 price from the previous example, here are the conversions:

($899 / 10) * 71 = 6382.90 BTC units

or

(6382.90 / 71) * 10 = $899

In this fashion, it is possible to price items in units of Bitcoin relative to fiat currency or the reverse.

This system also reveals some interesting facts about Bitcoin:

  1. It is completely possible to make Bitcoin as easy to use as fiat currency;
  2. As previously stated in my post “Bitcoin and Divisibility,” the demand factor for Bitcoin has an inherently inflationary effect. Simply by increasing the Fractional Rate (which reflects a demand increase), the number of BTC units needed to purchase the same $899 increased proportionally;
  3. Bitcoin and fiat currency are indelibly linked. Without fiat currency as a correlative, pricing in Bitcoin is just as arbitrary as it is using fiat currency.

I will admit that I was wrong about another aspect regarding Bitcoin… it does have tremendous potential as a store of value. The thing I underestimated is how much information has a correlating dollar value, such as deeds to homes or cars and other contracts associated to assets or paid services. While I do not think these things have much value in a pure survival aspect, they obviously have a great deal of value for running a modern society. In other words, I don’t think Bitcoin has the intrinsic value of food, water, medicine, plumbing, electricity or a host of other essential life components. However, its ability to greatly simplify, store, and secure huge swaths of information with corresponding value is profound. Such a development could tremendously simplify many legal and financial processes.

I’m still greatly opposed to Bitcoin as it exists right now and would rather see it fail, regardless of its potential benefits, then have it manifest as another tool for inequality. Should Bitcoin the currency ever be fixed, then I would gladly support it as a technology and platform. But I can’t, in good conscience, support it until then.

Advertisements

3 thoughts on “Fixing Bitcoin Part II: Pricing with Bitcoin Units

  1. Pingback: The Gold (and Bitcoin) Fallacy | The Currency Paradox

  2. Pingback: Is Currency Devaluation the Cause of Deflation? | The Currency Paradox

  3. Pingback: Is Currency Devaluation Causing Deflation? | The Currency Paradox

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s